Breakdown
How it works
NPV discounts each future cash flow back to today at your required return and subtracts the investment. IRR is the discount rate at which NPV equals zero. Profitability index = PV of inflows ÷ investment (above 1 is good). Payback is the time to recover the cash outlay ignoring the time value of money.
Formula
Worked example
Invest 100,000; inflows 30k, 35k, 40k, 25k at 10%: NPV ≈ 3,330, IRR ≈ 11.5%, PI 1.03, payback 2.9 years → accept.
Frequently asked questions
What discount rate should I use?
Your cost of capital or required return: WACC for a company (often 8–12%), the mortgage rate or an opportunity-cost return for personal decisions.
NPV or IRR — which decides?
NPV. IRR can mislead with unusual cash-flow patterns or when comparing projects of different sizes. Use IRR to communicate, NPV to decide.
Why is IRR blank?
No IRR exists when cash flows never turn positive overall (or change sign more than once). Check the signs: investment negative, inflows positive.
Excel equivalents?
=NPV(rate, CF1:CFn) + CF0 (Excel's NPV excludes year 0) and =IRR(CF0:CFn).